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It's the gap that won't go away. No, not the one between the developing world's rich and poor, or even the one between the economies of the U.S. and China. It's the gap between the safest emerging-market stocks and the riskiest ones—and investors should get used to it.

While the MSCI Emerging Markets Index has a price/earnings ratio of 10.3 times the next 12 months of earnings, the average "cyclical" stock, whose earnings are linked to the strength of the global economy, has seen its valuation fall to 9.6 times. The average "defensive" stock, meanwhile, has a P/E ratio of 15.1 times. The 5.5-point gap between the two is more than twice the average of 2.7 points since 1995, according to UBS data, and it's been at least that high for the last six months.

Don't expect the gap to narrow anytime soon. Sure, the MSCI Emerging Markets Index rose 1.6% this week through Thursday. But that gain came against a backdrop of sluggish global economic growth. U.S. gross domestic product grew by just 2.5% during the first three months of 2013, below forecasts of 3%. China's manufacturing activity slowed in April, according to the HSBC Flash Manufacturing Purchasing Managers' Index. Without accelerating growth, don't expect investors to take a shine to cyclicals. "We're all waiting for better global growth," says UBS strategist Nicholas Smithie. "It's not improving enough to tempt investors into the more cyclical parts of the market."

But many are also concerned about the sky-high multiples in defensive stocks. The logical choice would be to look for companies that have decent growth and reasonable valuation, but good luck finding many of those, says Smithie. In a quest to find "growth at a reasonable price," he screened for stocks with low P/E ratios, high returns on equity and other metrics. Out of 823 stocks in the MSCI Emerging Markets Index, just 53, or 6%, passed.

The lack of middle ground forces investors to make a choice: Do they buy the expensive defensives and hope they keep rising or look for cheap cyclicals and pray they buck the trend? Arjun Jayaraman, manager of the Causeway Emerging Markets fund, prefers shopping in the cheaper reaches of the market, but he's not a fan of buy-and-hope. Instead, he watches analysts' forecasts closely for signs that opinions about a stock are set to change.

A telling example is Chinese utility
Huaneng Power
(902.Hong Kong). It trades at 10.5 times forward earnings and earnings forecasts had been adjusted higher by 3.5% in the past four weeks. Huaneng should also benefit from falling coal prices, which will make providing energy cheaper, Jayaraman says. "We're not just bottom-fishing," he says. "We want to find growth in there too."

BlackRock's head of emerging markets, Jeff Shen, tries not to be put off by valuations as long as he believes a company can deliver earnings and cash flow. One example:
Merida Industry9914.tw 2.952029520295203%Merida Industry Co. Ltd.TaiwanTWD139.5
42.952029520295203%
/Date(1481316654000-0600)/
Volume (Delayed 20m)
:
503455
P/E Ratio
20.63609467455621Market Cap
40512306593.75
Dividend Yield
3.942652329749104% Rev. per Employee
24735300More quote details and news »9914.twinYour ValueYour ChangeShort position
(9914.Taiwan), a Taiwanese bicycle designer and manufacturer. While it trades at 19.7 times the next 12 months of earnings, it's expected to grow at an 11% clip in 2013—and has a history of beating expectations. "It's about delivery and execution, not simple valuation," Shen says.